How has retail money moved post demonetisation?

New demat account opening crossed 2 lakh accounts in March 2017, the highest number of accounts opened in a single month, in last 7 years.

One big change that demonetisation could bring about in the Indian economy is in the way Indians save. Traditionally, a large fraction the Indian households' wealth is saved in physical assets, in particular, gold and real estate. On average we invest about 78 - 95 per cent of our savings in gold and real estate, and we increase this amount as we near retirement.

While the share of financial assets (including bank deposits, shares, government securities, mutual funds, etc.) has been low for decades, demonetisation could have an impact in the long-term as gold and real estate get more difficult to buy due to increasing regulations.

Demonetisation could have initiated the process of a changing dynamics of household savings. "Demonetisation affected the savings habits of investors. They are now scared to hoard cash or stash it in real estate and gold. As a result, financial assets have started gaining prominence. In the wake of falling interest rates on deposits, investors are now keen on finding alternatives to the traditional fixed deposits," says Raghvendra Pratap Singh, co-founder, i2i Funding, India's second largest peer-to-peer lending firm.

Here is a look at how demonetisation has changed, if at all, the way Indians save.

Stock markets Stock markets scaled new heights within a year of demonetisation. On November 7, 2016, the BSE's Sensex was at 27,458.99 and a year later it is at 33,731.19 (as on November 6, 2017), a 23 per cent rise.

A lot of this increase is being attributed to the money that was deposited in banks and thereafter found its way in to the stock market. Behind the up move could be a probable reason that demonetisation could bring in a transformation from the unorganised sector to a more organised way of businesses. With the Goods and Services Tax (GST) kicking in from July 1, this factor got strengthened.

Overall, with easy liquidity conditions, both within and outside the country, the equity market remained buoyant through the greater part of the first half of 2017-18, with the Sensex crossing the 32,000 mark on July 13, 2017 and the NSE Nifty crossing the 10,000 mark on July 26, 2017.

How the global markets have been performing since July 2016

Interestingly, as can be seen from the graph below, more than foreign institutional investors (FIIs), it was Indian financial institutions like mutual funds that kept rally going.

Demat accounts: The number of newly opened accounts in NSDL increased from 14.3 lakh in 2015-16 to 14.8 lakh in 2016-17. And in March 2017 the new demat accounts opened crossed 2 lakh accounts - this the highest seen in the last 7 years. As on October 31, 2017, NSDL had more than 1.64 crore active demat accounts.

Mutual funds The money moving into mutual fund schemes also witnessed an increase. The mobilisation of equity-oriented schemes during April-August 2017 was higher at Rs 61,400 crore as compared to Rs 18,500 crore during the corresponding period last year.

"Demonstration had an indirect positive impact on the MF industry. As the real assets market staggered and more of the country's money entered the mainstream, a significant portion of it found its way to the one investment avenue that was performing and completely above board," says Rajiv Shastri (Executive Director & CEO, Essel Mutual Fund.

If assets under management (AUM) are a parameter to consider, then the post-demonetisation shift in the composition of financial savings of households into financial assets expanded the AUMs of mutual funds considerably from about Rs 1,75,000 crore at end-March 2017 to a record of Rs 2,06,000 crore by the end of August 2017.

“Post demonetisation, there has been a structural shift in investment pattern of investors from physical assets such as gold and real estate to financial assets. Presently, mutual fund industry’s average AUM are at all time high (Rs. 20.40 lakh Crore). And if we look at SIP book, it is astonishing Rs. 5,200 Crore SIPs per month. This clearly shows the shift towards mutual fund, mainly through SIPs,” says Amar Pandit, CFA, founder and chief happiness officer at HappynessFactory.in, a financial advisory firm.

The popularity of mutual funds has not been restricted to major cities. According to RBI's Financial Stability Report June 2017, the AUM of B-15 (beyond top 15 cities) cities has expanded by 230 per cent during the four year period from 2012-13 to 2016-17 and the growth trends is in tandem with the overall growth of MF industry AUM. The B15 locations accounted for 17.7 per cent of the total industry AUM in September. B15 towns have witnessed AUM growth of 38.5 per cent or Rs 1.05 trillion to reach Rs 3.79 trillion at end-September from Rs 2.74 trillion a year ago.

Reduction in interest rates of bank deposits after demonetisation enhanced the relative attractiveness of debt oriented mutual funds. As a result, there were net inflows in income/debt schemes during November 2016-January 2017 in contrast to net outflows during November 2015-January 2016.

The industry added 59.1 lakh new folios in the first six months of fiscal 2018 of which the contribution of equity (including equity-linked savings schemes) and balanced categories is an astounding 91 per cent or 54 lakh folios.

Insurance Premiums collected by life insurance companies more than doubled in November 2016. Premiums collected by Life Insurance Corporation of India (LIC) increased by more than 140 per cent (year-on-year) in November 2016 as compared with less than 50 per cent by private sector life insurance companies.

"Life insurance premiums are sourced in three ways: cash, cheque and online payment. Of course soon after demonetisation the industry witnessed a sharp spike in cash payment of premiums, but over time we have seen even households from Tier-2 cities that preferred cash getting comfortable with NEFT and ECS mandate. This huge behaviour change has significantly improved contactibility and will reduce unclaimed funds," says Karni Singh Arha, chief financial officer, Aviva Life Insurance.

About 85 per cent of the total collections by LIC in November 2016 were from 'single premium' policies, which are paid in lump sum, unlike the non-single premium policies that can be paid monthly, quarterly or annually. LIC effected a downward revision in the annuity rates of its immediate annuity plan Jeevan Akshay VI purchased from December 1, 2016, which might have created a spurt in collections in the month of November 2016 for LIC of India. The impact, however, seemed to be a one-time jump with the collections tapering subsequently.

Real estate In the pre-demonetisation era, cash ruled the real estate market. By the end of 2016, demonetisation had a negative impact on the sentiment in the real estate market across the country, with developers delaying new project launches and buyers delaying investment decisions. Builders were expected to cut their rack rates (per sq feet) but in contrast they more or less held on to the rates. Freebies and waiving off parking, club charges etc. became the norm but as affordability still remains allusive, demand seems stagnant across the country.

Dr. Niranjan Hiranandani, President, NAREDCO says, “Past one year has been an eventful year and the real estate sector has experienced a roller coaster ride. There were ups and downs but fortunately things are on revival mode as of now. Past one year not only witnessed demonetisation but also other big policy developments like implementation of RERA as well as big taxation reform like GST. To be honest, all of these have had their own share of teething troubles but fortunately so far things are under control. Demonetisation has led to greater efficiencies and transparency in the real estate sector and we welcome this. Just like their impact on honest taxpayers, these developments have helped the sector as well.”

End-users may still be driving the market in some pockets but the investor community, understandably, is absent from the scene. "Time and again the back-to-back policy regulations reinforced a slowdown of sorts in an already sluggish market. The residential sector in particular was the worst affected. New projects dried up, home sales slipped to newer lows and piles of unsold stock remained untouched," Shishir Baijal, chairman and managing director, Knight Frank India.

The graph below shows how property prices remained largely unchanged even while new launches and sales volume nosedived.

Gold A fairly large proportion of gems and jewellery purchases in India are made in cash. After demonetisation, domestic demand for gold items spiked suddenly, with buyers reportedly willing to pay huge premiums to dispose of old currency notes with jewellers. Reportedly, jewellers sold 15 tonnes of gold ornaments and bars, worth around Rs 5,000 crore, (amounting to a fifth of the monthly sales of gold in a normal year) in the intervening nights of November 8 and 9 after the note ban.

As far as the price movement in the last 12 months is concerned, on November 8, 2016, the 24 Karat gold price in India was trading at Rs 29,157 per 10gm, while its price on November 6, 2017 was Rs 30,557 per 10 gm.

Monthly Gold Imports

With GST, demonetisation, and anti-money laundering (AML) regulations coming into effect, the demand for gold had been fluctuating. In an earlier observation, Somasundaram P.R., managing director - India of the World Gold Council (WGC) had remarked, "First half (January-June, 2017) imports were 532 tonnes, while demand was still 298 tonnes. Actually, pre-GST people imported as much as they could. But that didn't get converted into demand."

Overall, India's gold demand for 2016 fell sharply by 21 per cent to 676 tonnes from 857 tonnes in 2015. An initial rush for gold following the policy announcement came to a swift halt in the ensuing cash crunch. India's shock demonetisation policy brought the market to a virtual standstill.

Conclusion Most financial planners suggest that you keep not more than 10 per cent of your portfolio in gold, preferably through gold exchange-traded funds or gold bonds. Investing in real estate through borrowed funds should largely be avoided. As a salaried individual, Employees' Provident Fund forms the debt portion of your savings and increasing your contribution voluntarily through VPF may also help. Exposure in equity mutual funds for long-term needs and a planned derisking process as your goals near will help a household meet all targets with ease. Having the right mix of physical assets and financial assets is the key rather than hinging only at the latter.